Gold proves its unpredictability with a strong recovery in the first half of Q3 followed by some recent short term volatility.
Uncertainty within the world markets buoyed by the unexpected Brexit and continuing unfolding EU insecurity, combined with the highly contested and politicized American elections promoted a strong showing in the gold price. The magnitude of interest rate differentials around the world from low to negative in Europe to increasing trends in America create options for traditional gold investors. A sharp move back into gold ETF’s during 2016 illustrates that while Jewellery demand has declined, investor’s confidence is returning to gold maintaining a steady increase in gold demand. Gold producers remain under pressure with declining production due to challenges in managing mine inflation, reserve depletion and costly capital projects. Though supply has been boosted by increased gold recycling. Overall there remains a deficit in the supply of gold compared to demand and it remains to be seen whether this will impact future gold prices. M&A activity has sharply increased on the back of higher average gold prices in 2016 and consensus forecasts for a steady increase in future gold prices. Many producers look to expand and increase production inorganically due to less historical spend on exploration, while placing marginal operations or early stage exploration and development projects in the hands of emerging entrepreneurs.
After the prices declined steadily since February 2013, they strongly rebounded during the first nine months of 2016 — and remain around the level of the two-year high as observed in Q3 2016 averaging at US$1,325. During Q2 and Q3, the averaged spot price of gold reached about US$1,299/oz, increasing ~14 percent as compared with Q2 and Q3 2015. The spot prices of gold averaged at about US$1,273/oz during Q2 2016 — a 9 percent increase as compared with the Q2 2015 average of about US$1,171/oz.
The spot prices are forecast to reach US$1,360/oz in 2021, growing at a CAGR of 1.5 percent from about US$1,264/oz in 2016. Factors, such as sluggish Chinese growth, post-Brexit uncertainty and the impending US elections resulted the commodity to become popular amongst investors during H1 2016. Negative and low interest rate policies — which will remain prevalent across Europe and Japan — are also likely to support investment demand, by continuing to lower the opportunity cost of holding gold.
In September 2016, while announcing the prospect of gradual increases in the future, the US Federal Reserve’s Open Market Committee decided to maintain the Federal Funds rate at 0.5 percent. Rising interest rates discourage investment in gold, as they improve their turn on other interest yielding assets.
Source: Gold price in a range of currencies since December 1978, World Gold Council, accessed November 2016.
Source: Historical exchange rates, Oanda website; Gold price in a range of currencies since December 1978, World Gold Council, accessed November 2016.
Source: Gold price in a range of currencies since December 1978, World Gold Council; Credit Suisse – Precious Metals Outlook, 13 October 2016, via Thomson One; Consensus prices from Capital IQ; accessed November 2016.
Source: Credit Suisse – Precious Metals Outlook, 6 April 2016, accessed November 2016.
Source: Credit Suisse – Precious Metals Outlook, 13 October 2016, accessed November 2016.
The total value of deals increased to US$7.3 billion in Q2 2016 from US$1.3 billion in Q1 2016. The number of deals also increased to 46 during Q2 2016 and Q3 2016, from 24 deals in Q4 2015 and Q1 2016.
Of all the deals, the largest was announced on 30 June 2016 by Medco Energi Internasional, (a unit of Encore Energy Pte Ltd), who agreed to acquire an undisclosed majority interest in PT Amman Mineral Internasional (Jakarta-based gold operator) for US$2.6 billion. The transaction also included 82.2 percent interest in PT Newmont Nusa Tenggara (NNT).
Source: Mergermarket and Thomson One; accessed November 2016.
Price Outlook: Gold price in a range of currencies since December 1978, World Gold Council, Capital IQ consensus process; ‘Resources and Energy Quarterly’, Bureau of Resources & Energy Economics (BREE), Australian Government, September quarter 2016, accessed November 2016; Credit Suisse – Precious Metals Outlook, 13 October 2016, via Thomson One; accessed November 2016.
Supply and demand: Gold Demand Trends Q3 2016, World Gold Council, accessed November 2016; Credit Suisse – Precious Metals Outlook, 13 October 2016; JP Morgan, Iron Ore – Supply & demand check, 02 October 2016, via Thomson One; accessed November 2016.
Key developments: Mergermarket and Thomson database, accessed November 2016.